Latest Overbought, Low-Yielding Asset Class: Student Loans

By Michael Aneiro

In case you didn’t get enough of student loans as a student, you can now join the growing ranks of investors piling into this type of debt. Ruth Simon, Rachel Louise Ensign and Al Yoon report in today’s Wall Street Journal:

SLM Corp., (SLM) the largest U.S. student lender, last week sold $1.1 billion of securities backed by private student loans. Demand for the riskiest bunch—those that will lose money first if the loans go bad—was 15 times greater than the supply, people familiar with the deal said.

Meanwhile, SecondMarket Holdings Inc., a New York-based trading platform best known for private stock shares, said it would roll out on Monday a platform to allow lenders to issue student-loan securities directly to investors.

The story says investors’ hunger for risky loans shows the lengths they’re willing to go to generate returns in today’s ultra-low interest rate world. But the problem is that just as investor interest is on the rise, so is the rate of student loan delinquency and default:

But while investors are piling into student loans, borrowers are falling behind on their payments at a faster clip. According to a Thursday report by the Federal Reserve Bank of New York, 31% of people paying back student loans were at least 90 days late at the end of the fourth quarter, up from 24% in the fourth quarter of 2008. The figures include federal student loans and those issued by private lenders.

Within minutes of publishing this post, we received an email from Sallie Mae asking us to mention – as the WSJ story briefly does as well – that its own debt repayment metrics are actually improving, as a counterpoint to the NY Fed data. From Sallie Mae:

The vast majority of Sallie Mae’s private education loan customers are successfully managing their payments, as represented by improving delinquency trends. As of Dec. 31, 2012, loans more than 90 days past due decreased to 4.6 percent, from 4.9 percent in the year-ago quarter.

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MARCH 4, 2013 6:59 P.M.

Sally May wrote:

Sallie Mae deliberately falsifies credit reporting to hide actual default rates. For instance not reporting someone as late until 90-120 days after the fact. They also admitted to putting people in forbearance to avoid disclosing actual deliquency rates. Looks like the next bubble is about to burst. I say bring it on. Sallie Mae can die.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.